With Stocks In Flux, Why Analysts Think the Music Business Can Weather a Possible Recession

ISSUE 1 2019 - DO NOT REUSE
Illustration by Remie Geoffroi
     

As stocks founder and analysts warn of a possible recession, the music business could face another storm — and come through better than it did in 2008.

The last time the stock market crashed, in 2008, CD sales had cratered, summer tours were canceled and one of the major record labels faced serious business problems. Now, as the recent stock market decline hints at the possibility of a recession, analysts say the music business may be healthy enough to withstand it better than other sectors.

"The economics of the music industry have stabilized," says Tim Jorstad, business manager for Journey and The Doobie Brothers and chairman of AltaPacific Bank. "And even in a recession, people spend their money going to movies and concerts."

Unlike in 2008, when record companies had yet to transition from 99 cent download sales to streaming, and top concert-ticket prices had ballooned over 760 percent from 1998, pricing fans out, the music business is reasonably stable. Streaming is growing worldwide, labels are lean, and dominant promoter Live Nation's share price has jumped from about $2.50 to $50 during the past decade. Analysts say market conditions are unlikely to dissuade Vivendi from its plan to sell half of its Universal Music Group, the world's biggest record label; while a new Deutsche Bank report predicts the costs of signing artists will soar, it still values UMG at $33 billion, up from its earlier valuation of $22 billion.   

   

Although the market has recovered a bit since Christmas, stocks lost $84 billion during the final six weeks of 2018, and Apple's first earnings warning since 2002 hinted at a possible downturn for big tech companies. So far, the music company most affected by the market turmoil is Spotify, which went public in April 2018 at a stock price of $165 but dropped below $110 as recently as Jan. 3. Artists and labels have rebuilt their businesses around Spotify and competitors like Apple Music and Amazon Music Unlimited. Larry Miller, director of the music-business program at New York University's Steinhardt School, says a downturn could hurt public music companies, but they'd mostly withstand the pain because consumer music spending is stronger than it was during the last recession.  

"There's no question there would be pressure on the stock price if the economic headwinds get really strong," says Miller. "But the funds will continue to be there. Monthly average users will continue to grow."

Market activity, says a source at one major label, "wouldn't be the primary driver on the timing" of any Vivendi-Universal spinoff. "Music has always been very recession-resilient."

Spotify turned a profit for the first time in November. And thanks to Netflix, investors seem enamored with tech companies that own content, which is something Spotify and other music-streaming companies have not yet been able to achieve. Universal, by contrast, owns some of the most valuable music rights ever -- including EMI's recordings, which drooped during the last recession and sold for nearly $2 billion in 2011 -- and thus could prove resilient. "It's a wonderful time [for UMG] to come out," says Gene Munster, head of research for venture capital firm Loup Ventures. "Content is going to perform better than other disposable spending."

But market downturns are about perceptions, and a bear market could be "dangerous" for Spotify today, says Mark Mulligan, financial analyst at MIDiA Research in London. "If there were a downturn right now, Spotify would not be particularly well positioned to weather the storm. That doesn't mean it won't survive it. But give it another year or two -- then it'd be better placed." Jorstad adds that if its stock drops, Spotify could become a "takeover target for some well-capitalized company that is looking for a bargain."

Many analysts are more concerned about Live Nation, which has been growing steadily since the last recession; sales for the top 25 tours worldwide jumped to $3 billion in 2018, according to Billboard Boxscore. Eight years ago, promoters for acts from Christina Aguilera to Limp Bizkit kept their ticket prices too high, and fans stung by the recession stayed home, prompting canceled tours and deep discounts. Live Nation took the brunt, and while the company is in a stronger position now, some fear a repeat. (Live Nation, Spotify and UMG declined to comment.)

It's not hard to imagine music fans pulling back on $1,600 front-row tickets if the market continues to decimate their 401(k)s. But something truly cataclysmic would have to hit the economy for the same people to cancel $10 monthly Spotify subscriptions. "The pre-recorded music business is going to stay the same and the live business may take a hit," says Jim Urie, a former UMG distribution executive who is now a consultant. "It's possible people aren't going to have money, particularly for the very expensive, Rolling Stones-type tickets."

This article originally appeared in the Jan. 12 issue of Billboard.